Comment by wormpilled
21 hours ago
Basically arbitraging human imagination. People love coming up with fantastical concepts because they get attention, but the more exciting a market is, the less likely it is to actually happen. Reality is usually boring.
My general observation is that people tend to underestimate the likelihood of black swan events (covid, financial crisis) even as it's pretty obvious they're happening. And then when they do accept it, they react too far the other way and assume it's never going to end.
I've had success playing the markets in these specific cases. I did fritter away a lot of my gains from the financial crisis thinking I was a genius market timer. But I learned my lesson and didn't waver once I jumped back in after covid.
In both cases I got out before a bulk of the crash and timed the bottom almost to the day. Lucky I know, but I had reasons for both. For the financial crisis it was when Bill Fleckenstein closed his bear fund and put it all in MSFT. For covid it was when it looked like the lockdown was working and NYC hospitals weren't going to completely fall over like Northern Italy or Wuhan.
For any non black-swan scenarios, I assume I'll never get one up on the masters of the universe and just leave everything in blended age-appropriate funds.
I'm very concerned about an AI crash and the future of white collar work in general. But it feels more like a slow death to me than a black swan. So I'm just hedging with bonds and cash and stocks that hopefully don't crash as hard in a recession.
They underestimate the likelihood of black swan because it is very hard for adults to concretely imagine things that have not happened before and then even temporarily fully believe ~"dreams will come true."
One of my go-tos on this is the Fukushima nuclear accident. IIUC there were plenty of folks in Japan who knew of the high risk. Perhaps many interested in nuclear energy outside of Japan, too.
But the average adult if asked about the prospect of a major nuclear incident occurring say, "tomorrow," would narrow their eyes in skepticism. There's almost an instinctual level seeding of doubt.
This can be a good thing. LK-99 was an excellent test of the dissonance from dramatic changes in reality and costs of inaccuracy.
The greatest VCs I have known are exceptional at suspending disbelief to test their ability to basically shape world building.
Yeah, I can't say for sure it's going to happen, but I can clearly see a path where AI ends the middle class in developed countries, which has really only existed in its current form since WWII. Most people can't imagine that.
I would also not want to take even a fair bet against black swan because the day that "S&P500 falls to lowest level since 2016 as Labubus collapse" is the headline is the exact day I least want to lose a big pile of money gambling. If it's the shareholder's money though.... I'm probably getting laid off in that scenario anyways...
I make similar bets. The SAAS "apocalypse" looks like a buying opportunity to me.
This makes sense to me, but isn't there a risk of increasing the potential payoff high enough that someone is motivated to go out and make the yes side happen?
Consider this bot running on us military outcomes or something.
By design it's a game where people with inside knowledge or enough power to bend reality can steal money from people with gambling addiction. Automating your addiction might not be the best move.
This is what markets like Polymarket boil down to. Normies can't win. Some will, of course, but that's just chance and there's no way if ensuring it's you.
It's really no different than a casino: if you ever find yourself with more money than you walked in with, cash out and leave.
Best strategy for most people though is to simply not participate and you'll break even.
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You're thinking like an engineer and making the laughable assumption that "prediction markets" are markets. It's totally unregulated with all sorts of grifts and cheats. One of the platforms was promoting a high-return bet against Rory at the Masters yesterday.
You can make money off of all sorts of stuff. You can "sell" the bets, so there's lots of live pump and dump.
We've gone full circle. The bookie with no neck that smelled like onions was more honest than these platforms.
Wouldn't a high-return bet against Rory make sense? He was very likely to win.
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Well, that's why things aren't priced uniformly, isn't it?
The problem with that thesis is that this doesn't seem to actually work as a strategy